Strategies for rethinking risk in a tight market

The current restrictions of the COVID-19 situation undoubtedly present substantial risk challenges during these times of economic turmoil combined with the rapidly deteriorating insurance marketplace.

For organisations, accurate risk information including updated asset valuations is critical in a situation where insurers are currently reducing their capacity in certain industries.

Implementing proactive strategies and being more agile and responsive through accurate assessments of risk will go a long way to ensuring the key information is available for insurers making the decision to underwrite risk – both new and in renewals.

A tight market pushed further by pandemic

Australia has shown above 10 per cent increases in rates across the majority of its insurance business lines according to Aon Global Market Insights – Q4, 2019.  In the current insurance market, insurers are seeking to replenish their returns after being hit by a string of natural disasters, including the recent bushfires.

Historically low investment income mainly driven by low interest rates is set to continue following the current global COVID-19 pandemic, and this trend has prompted many organisations to rethink their risk transfer strategy.

An Aon study of organisations with the largest premiums (greater than $500,000) show premium increases of 26 per cent for property and 18 per cent for liability business lines during 2019 while exposures remained relatively flat since 2016.

This trend has accelerated over three consecutive years with property insurance premiums increasing by 5.6 per cent in 2017 to 26 per cent in 2019. Liability premiums are following the same trend where premiums increased by 7.4 per cent during 2018 and by 17.6 per cent in 2019.

These trends are likely to continue from 2020 until insurance carrier returns stabilise or underlying market conditions and trends in global events change significantly.

These conditions set the context for insurers exercising underwriting discipline in specific sectors, when looking to improve their underwriting profitability.

For example, the power sector has seen premium increases across both property (21.2 per cent) and liability (28.9 per cent) due to the increased frequency and severity of losses both locally and globally. Bushfires continue to remain top of mind with significantly restricted capacity in Australia.

Developing strategies that are supported by data and analytics is the key way organisations can meet the market halfway and ensure their risk and cost levels are managed effectively.

Although there is no one-size-fits-all solution, below is an overview of some of the key options organisations can consider implementing.

1. Review existing insurance programme structure

Organisations can seek to reduce the impact from premium increases by risk retention strategies such as adjusting deductibles, coverage limits and annual aggregates. Although this results in the retention of greater risk by organisations, an insurance programme can be designed through the considered analysis, for example, of loss histories where available or actuarial quantification methods where there is no data. This will enable the design of an optimal structure that sits within an organisation’s risk appetite.

2. Consider alternative risk transfer strategies

There are several alternative options (including Captives, Protected Cells and Member Protection Funds) available to organisations that balance traditional insurance and reinsurance with methods of self-funding. The benefits of implementing these various alternative risk transfer vehicles depend on the circumstances of the individual organisation that can be modelled and quantified with the appropriate due diligence.

3. Demonstrate a better risk profile to the market

The market pricing of risk is mainly based on each insurer’s loss experience from their respective portfolios. This may be to the disadvantage of organisations with better risk profiles who end up facing the same premium increases as those that have been subjected to large losses. These organisations can use data and modelling to differentiate their profile to the market and navigate through the current market conditions.

Proactive and responsive actions

It is an anxious time for all organisations coping with the COVID-19 pandemic.

Key to being successful in this market resides in clear strategy supported by data and analytics, understanding of the market, optimal program and placement design, and the ability to deliver successful risk transfer.

Performing the appropriate analytical due diligence and gaining consensus over a strategy takes time – initiating these processes too late may limit an organisation’s options and leave them vulnerable to the tightening insurance market.

It is more important now that organisations use all the tools in their toolbox and pull as many levers as possible to unlock value in a thoughtful and sustainable way and make informed decisions around managing cashflow and their risk profile.

Find out how Aon can help your organisation rethink risk today, contact Sulav Saha on sulav.saha@aon.com.

This information is intended to provide general insurance related information only.  It is not intended to be comprehensive, nor does it, or should it (under any circumstances) be construed as constituting legal advice.  You should seek independent legal or other professional advice before acting or relying on any of the content of this information. Before deciding whether a particular product is right for you, please consider the relevant Product Disclosure Statement (if applicable) and full policy terms and conditions available from Aon on request or contact us to speak to an adviser. Aon will not be responsible for any loss, damage, cost or expense you or anyone else incurs in reliance on or use of any information contained in this article.